Will Y2K trigger recession?

One investment firm's prediction that failure to bring computer systems into compliance for the year 2000 could start a global recession isn't too far fetched, say other economic observers.

4 min read
A recent prediction by a Chicago-based investment firm that failure to bring computer systems into compliance for the year 2000 could start a global recession isn't too far fetched, say other economic observers.

At a Year 2000 seminar held in Chicago on Monday, Dennis Grabow, founder and CEO of the Millennium Investment Corporation, said his firm's analysis shows there are not enough man-hours available to evaluate, test, and implement compliance by the turn of the millennium.

"Even if a particular location is brought into compliance, the disruptions in other dependent but noncompliant supplier and customer facilities can slow or even shut down production in the compliant facility," he said.

His firm believes there will be a global disruption of business. It also thinks there will be a significant transfer of wealth from the shareholders of vulnerable enterprises to shareholders of companies that have completed or are near compliance, are able to increase market share, and are implementing industry consolidation strategies.

"A disruption in the flow of goods around the globe has the potential of causing an economic recession in every industrial country," Grabow added.

The Year 2000 problem, or the millennium bug, boils down to this: Many computer systems use software which tracks dates with only the last two numbers of the year, such as 97, instead of 1997. When 00 comes up for the year 2000, many computers will view it as 1900 instead, leading to potential failures.

Patches and upgrades to new systems are fine for businesses with packaged software, but for much of the older, custom software on mainframes and "hard-coded" software resident in cash registers and other systems, diagnoses and solutions will prove much more troublesome and costly.

Grabow's firm focused on the often-overlooked embedded systems found in the manufacturing and processing industries. He said his firm found that approximately one-tenth of all microprocessors utilize date and time information. The overwhelming task is locating and then testing them.

Millennium Investment estimates that the embedded systems challenge will consume 80 percent of the time and costs expended to bring a manufacturing and/or continuous process facility into compliance.

When asked if he thought his conclusions add to what some criticize as a doomsday scenario that has pushed the significance of the Year 2000 issue beyond realistic expectations, he said he isn't in the hype profession.

"The important thing for us is to protect our clients' wealth. We didn't write the script. We have interpreted what's been written," he said.

And his firm isn't alone in the dire forecasting.

Over the past six months, a number of economists, industry analysts, and federal agencies have released reports on the probable impact on the economy if the current number of companies and institutions implementing Year 2000 compliance programs fail to do so by the turn of the century.

Edward Yardeni, chief economist of the New York branch of Deutsche Morgan Grenfell, said he isn?t surprised by Grabow's conclusion. "I've been making a similar prediction since July," he added.

In a study completed in July, Yardeni concluded that there is at least a 30 percent probability of at least a mild recession in 2000. By September he was predicting a 40 percent probability.

Although he believes that most businesses will undoubtedly fix the Y2K bug in time to avoid full economy-wide disaster, some businesses might fail, which would boost unemployment.

"If they are important vendors to other companies, the domino effect could be disruptive enough to cause a recession. Companies that fix the problem will be in a great position to acquire those that haven't. The new millennium might begin with a wave of mergers and acquisitions, which might also mean fewer jobs," he stated in his report.

However, Yardeni said it is too early to say the recession is inevitable. "I don't know enough yet to bump the probability above 50 percent. In another year maybe. If there is a recession it will compare to the one we had in 1973 and 1974."

Many observers point to companies' slow response to both industry and mainstream media's warnings as a reason for concern.

"It has us scratching our heads," Bob Cohen, vice president of the Information Technology Association of America, said. "It's hard to find a crisp response to the problem. There are some companies that are aware. But it's hard to find one actually implementing a compliance program."

It is conceivable that the net effect would be a slowdown in the economy, he added.

With this conclusion, Grabow is telling his investors to prepare. "We're telling them to think about it and get ready. We've told them to look closely at what assets they're holding? and over the next two years look at what solutions or strategies companies make. Learn about it and then take action," he said.